Too Much Weed: Canadian Cannabis Producers are Sitting on a Mountain of Inventory, and it’s Making Some Industry Watchers Nervous

Article by Vanmala Subramaniam, Financial Post

Too much weed: Canadian cannabis producers are sitting on a mountain of inventory, and it's making some industry watchers nervous Some analysts are concerned the massive stash could precipitate a price crash in the burgeoning industry Since January of 2019, the amount of unfinished inventory of dried cannabis has nearly tripled, reaching a staggering 328,000 kilograms at the end of August.Blair Gable/Reuters files Vanmala Subramaniam

Canadian cannabis producers and extractors are sitting on a massive stash of unfinished inventory that is growing so quickly that some analysts are concerned it could precipitate a price crash in the burgeoning industry.

Since January of 2019, the amount of unfinished inventory of dried cannabis has nearly tripled, reaching a staggering 328,000 kilograms at the end of August. That compares to roughly 118,000 kilograms eight months earlier, according to Health Canada data.

Health Canada defines unfinished inventory as the amount of cannabis held in stock by a “cultivator or processor that is not packaged, labelled and ready for sale.” It defines finished inventory, a figure pegged at 60,872 kilograms at the end of August, as product ready for sale that is held in the warehouses of provincial wholesalers and licensed producers.

With sales of dried flower reaching just 13,000 kilograms in August, that means total inventory tracked by Health Canada was nearly 30 times the industry’s monthly sales rate.

While it is unclear what percentage of the unfinished inventory consists of dried bud versus cannabis trim (leaves from the plant that can be used for extract products) or even potentially other plant waste, the rapid growth in the metric has some analysts concerned.

“If a large proportion of that 328,000 kilograms is dried bud, that’s going to be a big problem for the LPs,” said Matt Bottomley, a cannabis analyst at Canaccord Genuity Corp., a week before a slew of earnings reports were expected from producers including Canopy Growth Corp., Tilray Inc. and Aurora Cannabis Inc.

“I suspect it’ll be a race to the bottom with price because everyone now has more than enough supply,” he said.

The inventory build-up marks a sharp turn for an industry that struggled with a shortage of product in the early days of legalization, just a year ago. But a limited retail network and the exponential increase in the amount of cultivation space in use across the country have allowed stockpiles to balloon rapidly.

Producers have already started lowering prices, a move that is bound to affect the margins of retailers as well. Recently, Hexo Corp. began selling a new product line called Original Stash, priced at just $4.49 per gram, roughly 50 per cent lower than the average per gram price on the legal market.

Hexo also announced it was shutting down its Niagara greenhouse and suspending 200,000 square foot of licensed space for cultivation, firing 200 employees in the process.

“If you look historically, licensed producers typically get about 60 per cent wholesale pricing. So a gram of bud will go for $10 on retail, but LPs will get about $6.50 at the high end before paying excise taxes. That’s going to go down to 50-50 very soon,” Bottomley said.

But Chris Damas, a long-time cannabis analyst and author of The BCMI Report, points out that while unfinished inventory numbers were on the higher end, finished inventory — the amount of cannabis packaged, labelled and ready to sell sitting in warehouses of either producers or provincial wholesalers — was at a much healthier level.

“Given the size of the legal supply chain is always increasing, I thought this showed some good absorption,” he said, with regards to the August sales data.

Finished inventory held by provincial distributors and retailers (excluding products in the vaults of licensed producers) decreased by 2.3 per cent in August. On average, this inventory was 2.5 times sales for the month, a figure that is typical for the retail business.

“I’d rather know that I have two-and-a-half months of product available than nothing at all,” said Mark Goliger, CEO of Meta Growth (formerly National Access Cannabis Corp.), one of the largest cannabis retail chains in the country.

What worries Damas more are the inventory numbers for cannabis oil, which stand at 6.3 times oil sales for the month of August. “Oil is moving very slowly and this is going to get worse once concentrates come onto the market because not many people are going to want to buy diluted oil products out there already,” he said.

Read the full article here.

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